January 2024 core sector growth at 3.57%, but positive revision likely

26 Jul 2024 , 01:00 PM

Core sector at 3.57% in January 2024 as base expands

On the last working day of February 2024, the Office of the Economic Advisor published core sector growth for the month of January 2024. Simultaneously, it also put out the cumulative core sector growth for the first ten months of FY24. After touching a peak of 12.67% in the month of October 2023, the core sector has stayed under 8% for the last 3 months in a row. In November 2023, the core sector core sector growth fell to 7.90% and further to 4.88% in December 2023. In January 2024, the core sector growth has come in lower at 3.57%. However, here it must be remembered that this is the preliminary figure for January 2024 and the number typically goes through 2 iterations. For instance, the first revision for December 2023 had spiked the core sector growth by a full 106 basis points. Hence, that is a positive tiding that one can also hope for in the current month also.

The core sector is announced with a lag of one month. For instance, the January core sector growth was announced on the last day of February while the February core sector will be announced on the last day of March 2024. Once the core sector is announced, it goes through a first revision after a month and a final revision after 3 months. The core sector is critical as it covers the 8 core infrastructure sectors and measures the output. These 8 infrastructure sectors include coal, electricity, crude oil, refinery products, natural gas, cement, steel, and fertilizers. The hydrocarbon family has a weightage of over 45% in the core sector basket. The core sector normally acts as a lead indicator for IIP and GDP since the core sector has a 40.27% weightage in the IIP basket. That is what makes it so critical.

Capex growth is actually higher than stated in Budget 2024-25

One of the concerns in the current interim budget was that the infrastructure capex was growing at a much slower pace. For instance, after growing capex at 30% for 2 years in a row, the current budget has only grown capex at 11.1%. However, the capex base of FY24 has been reduced, so that actual spike in capex should be positive for industry overall. The bigger narrative here is that the capex has a long term downstream effect and also has a multiplier effect. That means, the capex of FY23 and FY24 will also have a lag effect in FY25 in terms of higher infrastructure investments. Also, there is the multiplier effect. The impact of infrastructure thrust on actual output is a multiplier factor since the actual impact on the output tends to get magnified. That is what makes the core sector data crucial from an overall economy standpoint.

Core sector revisions in January 2024?

Even the latest interim budget, despite being a stop-gap arrangement, has decided to retain the momentum of infrastructure spending. In the last 2 years, this effort was magnified by private sector participation as is evident from the overflowing order books of capital goods companies in India. While core sector captures absolute growth, the revisions capture the underlying trend. Here is a quick analysis. The first revision for December 2023 raised core sector growth by 106 bps from 3.82% to 4.88%. At the same time, the final revision for October 2023 upgraded core sector growth by 64 bps from 12.03% to 12.67%. These revisions bode well for January 2024 numbers.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
Jan-23	9.67	13.61	-1.06	5.22	4.54	17.91	14.35	4.70	12.66
Feb-23	7.38	8.97	-4.90	3.13	3.32	22.23	12.35	7.42	8.15
Mar-23	4.24	11.67	-2.85	2.67	1.54	9.72	12.09	-0.20	-1.57
Apr-23	4.57	9.14	-3.55	-2.86	-1.50	23.54	16.56	12.36	-1.12
May-23	5.23	7.23	-1.94	-0.33	2.78	9.71	11.96	15.92	0.83
Jun-23	8.37	9.76	-0.56	3.48	4.58	3.44	21.31	9.95	4.22
Jul-23	8.55	14.95	2.06	8.92	3.56	3.29	14.92	6.89	7.95
Aug-23	13.42	17.89	2.15	9.95	9.49	1.79	16.35	19.74	15.31
Sep-23	9.44	16.03	-0.36	6.57	5.55	4.21	14.79	4.75	9.87
Oct-23	12.67	18.41	1.31	9.93	4.24	5.35	13.61	16.98	20.34
Nov-23	7.90	10.90	-0.40	7.60	12.44	3.36	9.40	-4.03	5.73
Dec-23	4.88	10.69	-1.03	6.59	4.03	5.85	7.57	3.81	1.23
Jan-24	3.57	10.21	0.70	5.52	-4.34	-0.56	7.00	5.59	5.21

Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)

The table above provides the core sector growth trend for the 13 months from January 2023 to January 2024. The positive momentum has been sustained since March 2023; barring some minor glitches to the trend; but these were largely on account of the base effect. Even in January, the current number is slightly low due to the high base effect. Out of the 8 core sectors, 6 sectors showed positive growth traction in January 2024; with only refinery products and fertilizers showing negative output growth. Core sector growth weakness came from the slackening of momentum in refinery products while fertilizers output tapered after the end of the Rabi sowing season.

January 2024 – Sectoral leaders and laggards in Infrastructure

The two connected sectors that have driven core sector growth are coal and electricity. For January 202r4, coal output growth grew at 10.21% while electricity generation grew by 5.21%. The demand for coal and electricity had peaked a couple of months and after a short lull, they continue to drive the infrastructure output with their combined weightage of over 30% in the core sector basket. Steel and Cement also grew at 7.00% and 5.59% respectively on the back of a sharp revival in construction and infrastructure project demand. These two sectors contribute over 23% to the weight of the core sector basket.

The big pressure points were refinery products which saw negative growth at -4.34%. In fact, the refinery shutdowns, and the erratic supply of crude due to the Red Sea crisis has led to the refinery products growth falling from 12.44% to -4.34% in the last two months. The fertilizers sector also saw negative growth, while crude oil production was flat and natural gas output grew by a robust 5.52% in January 2024.

High frequency core sector growth for January 2024

We now change focus from yoy growth to MOM growth, which is the high frequency measure. Now, yoy growth does not capture short-term fluctuations and is very vulnerable to base effect. That is where high frequency data (MOM) growth in core sector comes in handy. The shaded column in the table represents high frequency data. What do we take away from the reading of the high frequency core sector growth for January 2024?

Core Sector Component	Weight	Jan-24 (YOY) %	Jan-24 (MOM) %	FY24 Cumulative (%) *
Coal	10.3335	+10.21%	+7.23%	+12.20%
Crude Oil	8.9833	+0.70%	+1.91%	-0.17%
Natural Gas	6.8768	+5.52%	-0.17%	+5.56%
Refinery Products	28.0376	-4.34%	-6.30%	+3.87%
Fertilizers	2.6276	-0.56%	-1.80%	+5.50%
Steel	17.9166	+7.00%	+3.97%	+13.09%
Cement	5.3720	+5.59%	+1.65%	+9.01%
Electricity	19.8530	+5.21%	+8.09%	+6.80%
Core Sector Growth	100.0000	+3.57%	+2.22%	+7.75%

Data Source: DPIIT (* FY24 is 10-months data)

Broadly, there are two categories of sectors in the core sector basket. The hydrocarbons segment comprising of crude oil extraction, refining and natural gas has combined weight of 43.9% in the overall core sector basket. Obviously, this segment has contributed to keeping the core sector under pressure due to the negative growth in refinery products. Crude and natural gas are positive, but they have a much lower weight. Interestingly, the MOM growth is positive across 5 out of the 8 sectors, which is the reason MOM core sector basket growth stands at 2.22%.

Let us focus on the drivers of the MOM growth in January 2024. The growth is clearly being driven by Coal and electricity, both of which have grown at over 7% in the month. This is evidence of the turnaround after a lull in this sector, we had referred to previously. The pressure on refinery products is visible intuitively and also if one looks at the sharp fall in the MOM growth of refinery products. Steel is robust on an MOM basis also.

Charting core sector growth – The 10-year story

Here is how core sector growth panned out over the last decade. From FY13 to FY23, we have pinned full year data. For FY24 data here is 10 months data from April 2023 to January 2024 and that is likely to give a reasonably picture of how FY24 will pan out. We also added the comparable 10 months for the last two fiscal years of FY23 and FY22.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers   (%)	Steel  (%)	Cement (%)	Electricity   (%)
2012-13 (Apr-Mar)	3.82	3.19	-0.60	-14.42	7.15	-3.32	7.92	7.46	4.00
2013-14 (Apr-Mar)	2.56	0.95	-0.19	-12.92	1.39	1.47	7.32	3.74	6.05
2014-15 (Apr-Mar)	4.94	8.05	-0.87	-5.33	0.17	1.30	5.11	5.91	14.81
2015-16 (Apr-Mar)	2.98	4.83	-1.39	-4.72	4.88	7.02	-1.28	4.62	5.69
2016-17 (Apr-Mar)	4.76	3.19	-2.53	-1.03	4.89	0.21	10.74	-1.23	5.84
2017-18 (Apr-Mar)	4.28	2.57	-0.90	2.86	4.58	0.03	5.57	6.33	5.32
2018-19 (Apr-Mar)	4.37	7.38	-4.15	0.82	3.13	0.34	5.09	13.31	5.16
2019-20 (Apr-Mar)	0.36	-0.35	-5.95	-5.64	0.22	2.67	3.36	-0.88	0.94
2020-21 (Apr-Mar)	-6.39	-1.87	-5.21	-8.17	-11.22	1.65	-8.66	-10.80	-0.49
2021-22 (Apr-Mar)	10.41	8.55	-2.64	19.24	8.93	0.69	16.94	20.77	7.96
2022-23 (Apr-Mar)	7.80	14.84	-1.72	1.60	4.82	11.31	9.26	8.70	8.89
2021-22 (Apr-Jan)	11.61	10.26	-2.60	21.22	9.29	-0.31	19.94	24.72	8.52
2022-23 (Apr-Jan)	8.26	16.12	-1.32	1.35	5.35	10.48	8.63	10.01	10.14
2023-24 (Apr-Jan)	7.75	12.20	-0.17	5.56	3.87	5.50	13.09	9.01	6.80

Data Source: DPIIT (FY2023-24 data is for 10 months)

What are the major takeaways from the core sector data trends in the last decade?

• FY24 growth in the first 10 months is quite impressive at 7.75%, and is only slightly lower than FY23. The FY22 growth at 11.61% for the first 10 months is not exactly comparable since this growth came on a very low base in the aftermath of the COVID pandemic.
• What do we quickly gather from the 10-year data? From the pre-COVID levels, the infrastructure output is 24-25% higher and this is after the negative impact of the pandemic is factored in. That means; post pandemic, Indian core sector has bettered pre-COVID average growth rate, thanks to the infrastructure thrust of the centre.
• Over the last 11 years, the average core sector growth has been around 3.62%, so at 7.75% cumulative growth in FY24, the core sector is a good 400 bps above the average. This growth is notwithstanding the headwinds at a domestic and international level.

That brings us to another question; will the RBI take a cue from the core sector data and look to boost the core sector growth with rate cuts. Does this make a case for the RBI to really front-end rate cuts this year?

Core sector growth – Union Budget and Monetary policy impact

A lot of the core sector growth in the coming months will predicate on how aggressive the government gets on capex post the Interim Budget. Remember, the government has cut the capex target for FY24 to rein in fiscal deficit at under 5.8% in FY24 and at 5.1% in FY25. However, the full budget in July may give a better picture of what the government is planning to do. Regarding the RBI cutting rates, that is unlikely to happen till a new government is in place and the full budget has been presented.

The interim budget has given the signal that the government will remain steadfast on its capex spending, although the percentage growth is lower for FY25. For that, we have to await the full budget in FY25. One thing is clear, the RBI is unlikely to mix its monetary policy with core sector growth and stick to its inflation knitting. The core sector is more an outcome of fiscal policy, and that is something the government has given ample evidence of its commitment to infrastructure capex, even in the interim budget.